c. Requirements (continued)

Factor

Requirement

Cash back

There can be no cash back to the veteran from the VA first mortgage or a second mortgage obtained simultaneously.

Underwriting

The veteran must qualify for the second mortgage which is underwritten as an additional recurring monthly obligation.

Reference:  See section 5 of chapter 4.

Interest Rate

The rate on the second mortgage may exceed the rate on the VA-guaranteed first, however, it may not exceed industry standards for second mortgages.

“Rule of thumb” is that second mortgages are one or two percent above the market interest rates for first mortgages.

Assumability

The second mortgage should not restrict the veteran’s ability to sell the property any more than the VA first mortgage.

That is, it should be assumable by creditworthy purchasers.

Grace Period

There should be a reasonable grace period before

·   a late charge comes due, or

·   commencement of foreclosure proceedings in the event of default.

d. Unusual Terms

Second mortgages bearing unusual terms, interest rates, etc., are sometimes offered by parties such as

·   Federal, state, or local government agencies

·   non-profit organizations

·   private individuals

·   a builder, or

·   the seller.

Consult VA if it is unclear whether the terms of the second mortgage meet VA standards or if there may be a reasonable basis for VA to make an exception to the standards detailed in this topic.